The Basic Guide To Property Development Financing
Property development industry can be a very lucrative sector. But property development is no easy task. Far from it. Developers continuously face several challenges, from bad weather conditions to shortages of skilled workers, long delivery times and even rising fuel prices. As a developer, these issues can disrupt planning and budgets.
Here is a basic guide to property development financing.
What Is Development Finance?
Development finance is a short-term financial loan suitable for first time and experienced developers and builders. Generally, development finance affords developers fast access to finance and convenient repayment terms. Often, this type of financing comes with an 3-24 month duration. Even though valuation is important to loan acquisition, determining property value varies depending on the type of loan and unique requirements established by the lenders.
For instance, mortgage lenders may consider a property's value at different stages of a project's life cycle. In contrast, development finance can consider property valuation after completion affording you a huge lead time to accrue profits and repay your loans. Property development finance is a quick-fix financial solution for developers to raise more capital, helping them finance construction material costs and fees for project professionals.
When To Consider Development Finance
Development finance has existed in the real estate industry for years but it has become popular now more than ever due to uncertainties in the global real estate market presented by the COVID-19 pandemic and other political factors like Brexit in Europe. Development loans come with specific requirements. You should consider finance development if:
- You have the right paperwork
There is no one-size-fits-all method to secure a development finance loan. Every institution has its application requirements. Builders should consider development finance only when they have the requisite documents to back their requests.
Every document, receipt, and proof of ownership can better your chances of securing your development finance loan. Essential documents to have before applying for a development finance loan include your planning permit asset, liability, income, and expenditure (ALIAE) summary. These documents enable lenders to determine the amount of guarantee you bring on board and the extent to which you can bear unexpected costs.
- You’re confident about repayment
Lenders provide development finance to developers who can give them significant repayment assurance. Therefore, you may have to pass on this finance option if you fall short of good credit standards or cannot satisfy strong credit requisites. Lenders require a robust exit strategy, whether the developer will let or sell the property after completion.
- You’re ready to cover fixed expenses
Be ready to bear any unexpected cost if you're considering development finance. Fixed expenses like arrangement and exit fees are a mainstay in the development finance acquisition process.
Lengthening Your Terms
Developers can opt to extend their development finance terms beyond the traditional 3-24 month period if the short term is likely to lead to delays and construction issues. This extension is known as refinancing and can give you the opportunity to finish your project, sell your asset or arrange funding via traditional finance routes.
If You’re Still Unsure
Always consider discussing your situation with a property development finance broker. They know the industry and will be able to help you fully understand the circumstances, fees and what is required when you complete your application.
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